Economists at 10 paces over Chalmers’ blueprint

The inflation genie has become the touchstone issue of the budget and the benchmark the Treasurer has set for success or ­failure. And the politics of inflation appear to be getting away from him.

Federal Treasurer Jim Chalmers will hope his second budget does not lead to a surge in inflation and another interest rate hike. Picture: NCA NewsWire / Glenn Campbell

Jim Chalmers this week seemed surprised that people would be concerned about the impact his budget may have on inflation.

In the traditional blitz of post-budget interviews, the Treasurer was forced onto the defensive, the sales pitch derailed by legitimate concerns over whether the spending profile of the budget would put upward pressure on interest rates.

This is not where he or any treasurer expects, or at least hopes to be, following a budget.

For Chalmers, this was his first full rendition since the May 2022 election. But as he hit the hustings to sell the virtues of a “Labor values” budget aimed at protecting the most vulnerable, it was the inflation question that tripped him up.

Chalmers should not have been as unprepared as he seemed to be. It is he who has set this new political and economic benchmark with Treasury’s plucky prediction that the government’s $14bn cost-of-living package will do the opposite and apply a brake on inflation.

This is now a hotly contested issue and one that has dominated debate since Tuesday.

Many economists believe the budget is expansionary and will ultimately force the central bank back off the bench with more ­interest rate increases, or else keeping rates higher for longer.

Chalmers furiously disagrees.

It has since become economists at 10 paces.

Central to this economic and political dispute is whether Chalmers’ manifesto has forsaken middle Australia with a budget heavily geared to welfare recipients and with the possibility that borrowers – chiefly homeowners with a mortgage – will be worse off if the ­Reserve Bank of Australia believes it needs to respond to the spending through monetary policy.

Fortuitously for Peter Dutton, it has opened to the door for the ­Coalition to define a new political battleground: the “working poor”.

In an interview with the ABC’s Patricia Karvelas on Thursday, Chalmers protested the claim that the budget had left middle Australia behind and named the economists who agreed with him that his big-spending budget was an ­inflation fighting manifesto.

“ … that is not the unanimous view of the economists,” he said.

“I mean Bill Evans from Westpac says, ‘I don’t expect them to put upward pressure on interest rates’; Alan Oster from the NAB, ‘broadly neutral over coming years’; Stephen Halmarick from the CBA says ‘the move to surplus represents a fiscal contraction for this year that will be helpful in moderating the inflation pulse’.

“And so I think we need to be careful not to take an economist or two and pretend that there’s a unanimous view about it. Certainly, the very clear advice from the Treasury is that my budget … will take some of the edge off these cost-of-living pressures without adding to inflation.”

Karvelas was quick to pick up Chalmers’ selective use of Evans. “He’s quoted in The Australian as saying, ‘Do I believe it (the budget) will trigger a rate hike? No. Do I ­believe the rates relief I thought we would get in February could be delayed? Yes’.”

Chalmers’ response has now ­become the fallback position: Treasury says so, so it must be true.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers during Question time at Parliament House in Canberra following the budget. Picture: NCA NewsWire / Martin Ollman

There are plenty of reputable economists who disagree with Chalmers and Treasury.

Economist Chris Richardson drew the ire of the government this week, with Anthony Albanese even having a swipe at him after his assessment that the RBA would be brought back into the picture.

He was in good company. UBS, Deloitte, Evans and others were of the same view that pouring money into an economy already fighting an inflation problem is going to have an impact.

None argues against the virtue of increasing JobSeeker, or cost-of-living relief for the less privileged. The argument is that the government should at least be honest about the potential consequences.

Cabinet ministers out spruiking the budget have also been forced to defend against the claim that middle Australia was ignored in the process of Labor’s political down payment to “its people” and geared heavily towards its base above everyone else.

“Do middle Australians not have children? Do middle Australians not have energy bills? Do ­middle Australians not need medicines? Do middle Australians not need to see a bulk-billing doctor near where they live?” Aged Care Minister Anika Wells told Nine’s Today program on Thursday morning.

“We do all of this in the budget.”

Unsurprisingly, the left is less than enamoured with the outcome. The welfare lobby has criticised the paucity of a $40 fortnightly increase in JobSeeker and other welfare payments. It seems that in its attempt to give a little to a lot, Chalmers has befriended few.

But it is the inflation genie that has become the touchstone issue of the budget and the benchmark Chalmers has set for success or ­failure.

The key point is that Chalmers now owns the economy from here on in. And the politics of inflation this week appeared to be getting away from him. The Albanese government can no longer claim to have inherited a mess from the Coalition – a point equally hard to make considering the conditions that have afforded him the ability to post a surplus having been largely inherited. This provides Dutton with an opportunity to swing the politics of the economy back the Coalition’s way.

If there is an interest rate rise coming, it will be difficult for Chalmers and Albanese to avoid the tag of being responsible through budget mismanagement or a failure of strategy to combat ­inflation.

If the RBA holds fire, Chalmers will be vindicated. But this is high-stakes politics.

And Dutton has to be careful how he frames the battle.

His budget in reply speech focused on family-friendly social ­polices based on Liberal “values”. He leant into the so-called key broken promises and critiqued the budget’s inflationary spending.

Dutton has also zeroed in on the record migration numbers in the budget, which he sees as playing out badly for the government in ­regions such as western Sydney where residents are already under housing and infrastructure stress.

While the economic impact of the policies will continue to be debated among economists, the budget has ensured that the political battle for middle Australia has now come into sharper focus.